Until the early 1960s, many economists attributed the relatively small size of many industries in less developed countries to the scarcity of capital and administrative experience. It was often argued that with economic growth, the small, traditional enterprises would, in one sector after another, be superseded by modern forms of large-scale production. In order to ensure an orderly transition, small industries were seen to deserve support but mainly in sectors where modern production methods could not be immediately applied. Kilby (1969) sees SMEs as a quasi-sponge for urban employment and a provider of inexpensive consumer goods with little or no import content, serving an important pressure-releasing and welfare-augmenting function. SMEs also contribute to long-run industrial growth by producing an increasing number of firms that grow up and out of the small sector. Thus the emergence of wholly modern small- and medium-scale Kenyan industries is likely to be a prerequisite for any enduring industrialization in that country.
However, despite government efforts in Kenya to promote informal sector activity, not much progress seems to have been achieved, judging by the performance of the informal sector. Most previous studies throughout Africa treat the informal sector as essentially homogeneous in its characteristics (Morris and Pitt 1995; Bewayo 1995; Ekpenyong and Nyong 1992). Recent research suggests that government policy should be more narrowly targeted to subsectors within the informal sector (Parker and Torres 1994).
To address the need for more specific information about small-scale manufacturers in Kenya, this study examines survey data in order to identify what characteristics of small-scale manufacturers make it more difficult for them to be profitable and to assess the particular problems that these manufacturers face which may have contributed to their poor performance. In examining theses issues, the following research questions have been raised:
(1) What are the characteristics of SMEs with reference to the size of the enterprise, the age distribution of firms, educational background of the operators, and the site characteristics of their business operations?
(2) What are their sources of funds?
(3) Are the characteristics of the various informal sector industries similar enough for the industries to be treated by policy makers as a single sector?
(4) How have government policies affected the development of SMEs in Kenya?
For the purposes of our discussions, the terms "firm," "establishment," "business," and "enterprise" are used interchangeably. An "enterprise" is defined here as any income-earning activity that is not in primary agriculture or mineral production. There is no generally-accepted definition of a small business because classifying businesses as "large-scale" is a subjective and qualitative judgement. In countries such as the USA, Britain, and Canada, small-scale business is defined in terms of annual sales and the number of paid employees. In Britain, a small-scale business is defined as an industry with annual sales of 2 million pounds or less and with fewer than 200 paid employees. In Japan, small-scale industry is defined according to the type of industry, paid-in capital, and number of paid employees. Consequently, small- and medium-scale enterprises are defined as those in manufacturing with 100 million yen paid-up capital and 300 employees, and those in the retail and service trades with 10 million yen paid-in capital and 50 employees.
In Kenya, "micro-enterprises" are those with 10 or fewer workers, "small enterprises" have from 11 to 50 workers, and "medium enterprises" have from 51 to 100 workers. Censuses indicate that micro-enterprises comprise the lion's share of enterprises in Kenya, while there are a few medium enterprises (Parker and Torres 1994). Small enterprises are almost non-existent. Micro-enterprises are indigenous while the medium-scale and lager manufacturing enterprises are dominated by Asian (Indian) capital. …